CFTC said to review Wall Street banks for off-exchange trades

Information centers on EFS contracts

The top U.S. derivatives regulator is seeking documents from Wall Street banks about trades that combine features of swaps and futures since the Dodd-Frank Act became law, according to two people briefed on the matter.

The Commodity Futures Trading Commission made the request in a so-called special call for data on energy and metals trades since July 2010, when President Barack Obama enacted the rules overhaul including new derivatives measures, according to the people, who asked not to be named because the review isn’t public. The Financial Times, which reported on the CFTC’s probe earlier, said banks that received requests included JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. Spokespeople for all three banks declined to comment.

The information sought by the agency is about contracts known as exchange of futures for swaps, or EFS, which CME Group Inc., owner of the world’s largest futures exchange, has provided for more than a decade. The trades are conducted off exchange by brokers and then guaranteed at clearinghouses.

“Our rules and guidance on this trade type have been reviewed by the CFTC on many occasions and have been permitted to become effective through the rule submission process governing contract markets,” Terrence Duffy, CME Group’s executive chairman, said in a March 22 letter to the CFTC.

“The commission has also on numerous occasions proposed rules or guidance related to this type of transaction, but has never taken action to curtail or bar this popular and valuable market practice, which has served to mitigate counterparty credit risk through centralized clearing,” Duffy wrote.

Offsetting Swap

The trades have two legs, the first is a swap that investors agree to execute at the same time they enter into an EFS, Duffy said in the letter. The second leg is an identical and offsetting swap that is cleared as a future through CME’s ClearPort system.

Dodd-Frank requires the CFTC and Securities and Exchange Commission to write rules designed to have most swaps traded on exchanges or so-called swap-execution facilities. The law was enacted to reduce risk and increase transparency in the swaps market after largely unregulated trades helped fuel the 2008 credit crisis.

The CFTC has scheduled a May 16 meeting to vote on final rules for how swaps should be traded on SEFs and is considering reducing the number of price quotes buyers must seek before conducting a trade, three people briefed on the matter said last week.

Steven Adamske, the CFTC’s spokesman, and Michael Shore, a CME Group spokesman, declined to comment.

Bloomberg LP, the parent company of Bloomberg News, has filed a lawsuit challenging the CFTC over a Dodd-Frank rule that affects its planned SEF.